Monthly Cross Asset China Aging

China’s demographic headwinds


2 July, 2021

5 to 10 minutes
China’s demographic headwinds

2 July, 2021

5 to 10 minutes


The latest Census results suggest China’s population is aging faster than expected, prompting Beijing to relax birth restriction and move to a threechild policy. Recognizing the challenges to reverse low fertility, we expect China to rely more on the productivity driver for growth in the long run.

Population aging is more severe than projected

The results of the seventh Population Census show that the Chinese total population continued to grow, reaching 1.41 billion in 2020. However, population growth slowed further to 0.53% per annum in 2010-2020 from 0.57% in the previous decade. The share of working-age population (aged 15 to 64) shrunk to 68.5% in 2020 from the peak of 74.5% in 2010, while the senior population (aged 65 and above) rose to 13.5% of the total in 2020, from 8.9% in 2010.

Along with the slower-growing population, the birth rate is falling. The number of newborns dropped to a record low of 12m in 2020, against the backdrop of declining new marriages and a shrinking cohort of women of childbearing age. The pandemic outbreak may also have affected new births owing to delayed family planning. The total fertility rate (TFR) - an indicator holds age cohorts unchanged – stood at 1.3 in 2020, lower than most demography watchers had foreseen1. Needless to say, this level of TFR is lower than the replacement rate of 2.1 and is among the lowest around the world.

China’s TFR at 1.3 is among the lowest around the world.

The low fertility rate will be hard to reverse under the new three-child policy

Within weeks of the Census results, the Chinese Politburo announced a relaxation of birth restrictions, moving from a two-child policy to a three-child policy.

This marks a further shift away from birth restrictions to encourage more births. However, although birth restrictions have effectively contained the Chinese fertility rate since the 1980s, they are no longer the major dampening factor. The willingness to give birth has declined rapidly under social changes, surging house price inflation and the increasing costs of raising children.

In fact, the shift from the one-child to two-child policy in October 2015 gave a moderate boost to the fertility rate for over a year, but new births started to drop quickly from 2018 as the “catch-up” effect faded out. A recent survey2 reveals that the majority of Chinese households think two children are the ideal family size, but not more, indicating that the boost from the three-child policy or a full relaxation will be much smaller than the previous policy shift.

Total population will peak in around 2026

Assuming a full relaxation of birth restrictions in five years and a transitory rise in the total fertility rate, China’s demographic profile still looks challenging. Its total population will start to decline in the mid-2020s. The number of new-borns could fall below 10m in the late 2020s, after an initial rebound following the policy relaxation. Consequently,  the share of the old-age population (age 65+) will double in 20 years, to close to the level Japan has today.

For China’s growth, this means the first demographic dividend is long gone. The working-age population will continue to decline over the next half century, translating into lower potential growth. The second demographic dividend, achieved through investments in physical and human capital, is usually larger than the first one3, and will become the policy focus. The prevailing low fertility rates in East Asian economies provide important lessons: it is difficult to reverse the demographic profile in the long run but it pays off to invest in human capital and to tap into the talent dividend.

Working-age population will continue to decline over the next half century.


Policy implications: innovation is the new driver of growth

To address the aging population challenges, postponement of the retirement age is already under discussion. We also expect to see an enhancement of the social 3 IMF - What Is the Demographic Dividend? security network and a more determined crackdown on housing price speculation, which is believed to be playing a major role in depressing the fertility rate during the urbanisation process.

In an internal speech in January, President Xi noted that China’s old growth model is not sustainable amid environmental bottlenecks and rising labour costs. He regards innovation as “a matter of survival” and key to long-term economic development, indicating plans to boost potential growth by raising productivity over the long run. The Census results are a reminder of the demographic headwinds in China, which will add more weight to China’s transition to an innovation-led growth model.

1 The UN World Population Prospects 2019 forecast an increase of China’s total fertility rate from 1.70 in 2020-2025 to 1.77 in 2075-2100. In 2021, the CIA has estimated a rate of 1.6.
2 2020 Survey by Fudan University (in Chinese)
3 IMF - What Is the Demographic Dividend?

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